Biz school grads: Overeducated and underfunded?

November 23, 2010: 11:53 AM ET

An estimated 20% of business school grads are not making payments on their student loans, according to government data. And biz school grads are the best among the lot. Are we fast becoming a nation of over-educated debtors?

By Anne VanderMey, reporter

For the average American, higher education in recent years has become increasingly unaffordable. Now, with the economy in the tank, student loan default rates on the rise and the cost of education still increasing, new government data show that the squeeze may have reached one of the last holdouts for well-heeled students -- business schools.

Recent government data on student loan repayment show that 20% of students from elite business schools are struggling to pay down their student debt. And that average is miles better than the typical business school's, raising questions about what that means for the rest of us.

Unsurprisingly, the government numbers, released by the Department of Education this summer, found that graduates of the oft demonized for-profit and career schools were saddled with debt and not making payments.

But the for-profit schools are not alone.

The report, which is preliminary, also features thousands of other schools with less-than-perfect track records. Like Harvard Business School.

According to the data, 88% of Harvard Business School students over the last four years have paid down at least one dollar on the principal of their federal student loans. The other 12% have taken advantage of debt repayment options like forbearance, income-based repayment or deferment. Some of the students among that 12% probably never graduated. And some likely defaulted.

But that's not the bad news. Harvard is at the very top of the repayment heap, and leaps and bounds above the average school.

Elsewhere, the data were more troubling. The average repayment rate for public colleges and universities clocked in at an estimated 54%. It was 56% for private nonprofit schools and a dismal 36% for the for-profit colleges. Under proposed federal regulations, for-profit schools with student loan repayment rates under 45% would face some restrictions in federal aid, and those with rates under 35% could lose government financial aid altogether.

The business schools that reported separately from their associated universities easily outstripped national averages. In fact, most had repayment rates hovering around 80%, which, compared with the rest of the schools in the country, is about as high as it gets.

Still, the statistics raise an alarming question. Putting aside the vast rank and file of the American educational system, are two out of 10 elite business school students really struggling to pay back their federal student loans? Not to mention their private loans?

It's hard to say how much federal repayment statistics really tell us, says Mark Kantrowitz, college financial aid guru and founder of FinAid.org.

There are several caveats attached to the repayment numbers. There are questions about the makeup of the sample populations, worries over data collection and concerns about exactly who is in repayment.

Myriad factors can land students in the non-repaying category, including some widely approved-of debt management programs that allow for responsible payment.

Students seek help paying their debts for a variety of reasons -- some may forgo a high salary in order to start their own business. Others find jobs in government or nonprofit organizations with salaries that don't cover the bill. And still others might never find jobs at all.

As many schools and experts have been quick to mention, the federal loan repayment rates paint only a rough picture of a graduates' financial status.

"There is some degree of reality underlying it," he said. "But the correlation as to whether these students actually pay back the loans is weak."

The advantage of the repayment rate is that it indicates where students found it necessary to enter into at least some kind of management plan. That's different than simply looking at the standard default rate -- which was a fairly low 7% in 2008.

The repayment database, which will be used to develop federal regulations determining a school's eligibility for federal aid, marks the first time that we've been able to see past the default numbers for a more complete picture of graduates' finances.

The takeaway: No student -- not even graduates of the toniest business schools with the highest signing bonuses -- is guaranteed an immediate return on their educational investment.

It's virtually impossible for any school to have a perfect student loan track record. Take it from one that's close to perfect. The government-reported repayment rate was a respectable 81% at Carnegie Mellon's Tepper School of Business.

But many graduates now have a tougher time repaying loans than they did just five years ago, explains Ted Curran, Tepper's executive director of finance.

Students are arriving on campus with less equity. Post-graduation jobs placements are scarce even at schools with strong track records. And debt consolidation is more difficult than it once was, Curran says.

Beyond that, many business school's grads choose not to pursue high-paying jobs right out of the gate. Some defer loan payment to take an internship, work at a nonprofit organization, or do volunteer work abroad.

"They're saying, 'This might be the last time in my life I'll have a chance to make a difference,'" Curran says.

Among the business schools that reported repayment rates, Harvard led the pack. Stanford University's Graduate School of Business and the London Business School, both with 84% repayment, along with Babson College in Massachusetts, at 83%, also did well.

Duke University's Fuqua School of Business and the Wake Forest Schools of Business landed at 80%. Columbia University was at 77%, and the Pepperdine University Graziado School of Business and Management and the Thunderbird Global School of Management came in just below 70%.

Those rates could have a high margin of error, Kantrowitz says. Meaning that making direct comparisons between the schools using loan repayment data is a fraught practice because each school has its own approach to loan repayment.

As a whole, those statistics are likely to improve, financial aid directors say, as salaries rise and the economy recovers. And students could see some relief under new regulations as federal loans replace private lending, says Ben Miller, policy analyst for Education Sector. But for many, that won't address the root cause of financial woes --the cost of education.

"The onus really needs to fall now on the schools to not let all the assistance that's come from these changes to go to waste by just jacking prices," Miller said. "That is going to be the next step. It's a lot harder to do that."

As long as there are entrepreneurs, nonprofit workers, dropouts and slackers (and there always will be) no school's students will ever have a flawless record of immediately paying down debt.

The best hope for many students is scholarships and beefed up financial aid offerings or, even better, widespread reductions in the cost of higher education. But don't hold your breath.

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